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O/T - 401k legal question???

doll faced sm's picture

Ok, I am my father's only heir. Today, he called me and asked for my ssn; I have complete trust in my dad, so I give it to him, but then I asked what he wanted it for. He said he was leaving me as the beneficiary of his 401k (he doesn't believe he'll have much longer to live). About 15 min. later he called me back and gave me all his log-in info as well as his ssn so that I could log in to his 401k account b/c "when [he] dies, [I] can just log in and transfer the money into [my] bank acct. w/o having to go through" the 401k company. In theory, this sounds great, but I can't help but thinking this may be illegal. Isn't there an inheritance tax on this sort of thing?


sorryilovemydogmore's picture

You will have to start taking distributions and those will be taxed as income to you. Generally you would have an option of doing a lump sum (not recommended in most cases because of the huge tax bill), taking it over your life expectancy (based on an IRS table) or over a five year period. You would need to roll the 401k into an IRA and take the distributions from there. If you pulled it out of Dad's 401k and moved it right into a regular bank account, you would be responsible for the taxes on the entire sum in the year in which it was distributed. Not illegal, but generally not good from a tax bill perspective. Talk to a financial advisor. There may be one at your bank that can answer general questions.

As a disclaimer, I do this for a living and this is not at all to be construed as investment advice (just in case any of our compliance officers are step parents and have figured out my screen name....).

doll faced sm's picture

Ok, thanks. It didn't really occur to me when we were talking b/c I was actually at an apt. for my baby, but on the drive home, I was thinking that there was no way I should be able to just go in and take it. It didn't even occur to me to talk to someone at my bank about it, so again, thanks. I have USAA, and they're really good, so when/if the time comes, that's who'll I'll go to. Hopefully, though, he lives long enough to use it up!

Rags's picture

As for distributions, if inherited 401K proceeds follow the same rule of substantially equal disbursements that normally acquired 401K funds must follow you will not be required to begin withdrawals until you reach the required age. I beleive that this is currently 69.5.

I suggest that you call an attorney or your investment counselor/banker for the accurate and complete information.

queen-B's picture

I wish you were right in this case,but you're not. My father passed away two years ago, leaving my sister and I as beneficiaries. The 401k accout was split in two. Each of us must tak a distribution each year ( surviving spouses do not have this requirement), and the amount of the distribution is included in our taxable income. Sigh. It's not a huge amount/burden, but it is there.

Jsmom's picture

My husband passed away and his 401K sent me a check for the total amount. I deposited it in my IRA. Otherwise there would have been taxes owed on it.

sorryilovemydogmore's picture

There are differences between retirement assets inherited from a spouse and retirement assets inherited from a non-spouse. Generally spousal assets can be rolled into an account in the surviving spouse's name (usually it is not left in the 401k but put into an IRA like in Jsmom's case) and distributions would occur as if they were the surviving spouse's assets all along - ie RMD payments starting at 70 1/2.

For a non-spouse, queen-B's experience is normal. Inherited assets from a non-spouse do not follow the normal distribution rules that would apply in one's own account.

doll faced sm's picture

Ok, wow. Thank you all. If he does pass on before he uses his assets, I'll have to hire an attorney, accountant, or something. This is obviously much more detailed than I thought it would be. Yikes!